'Since You're So Rich, You Must Be Really Smart': Talent and the Finance Wage Premium
Sveriges Riksbank Working Paper Series No. 313
103 Pages Posted: 19 May 2016 Last revised: 20 Mar 2018
Date Written: March 2018
Wages in the financial sector have experienced an extraordinary increase over the last few decades. A proposed explanation for this trend has been that the demand for skilled workers in finance has risen more than in other sectors. We use Swedish administrative data, which include detailed cognitive and non-cognitive test scores as well as performance in high-school, to examine the implications of this hypothesis for talent allocation and relative wages in the financial sector. We find no evidence that the selection of talent into finance has improved, neither on average nor at the top of the talent and wage distributions. A changing composition of talent or their returns cannot account for the surge in the finance wage premium. These findings alleviate concerns about a “brain drain” into finance at the expense of other sectors, but they also point toward strongly increasing wage premia for this industry over time.
Keywords: Sectoral Wage Premia; Talent Allocation; Earnings Inequality; Compensation in Financial Industry
JEL Classification: J24, J31, G20
Suggested Citation: Suggested Citation